Conoco's Kashagan partners have two months to pre-empt stake sale

Smoke is released into the sky at the ConocoPhillips oil refinery in San Pedro, California March 24, 2012.
REUTERS/Bret Hartman

By Nidhi Verma| NEW DELHI

NEW DELHI ConocoPhillips' (COP.N) partners in Kazakhstan's Kashagan field, the biggest oilfield discovery in over four decades, have 60 days to decide whether they want an 8.4 percent stake in the project promised to India's Oil and Natural Gas Corp (ONGC.NS).

ConocoPhillips says it intends to sell its Kashagan stake to ONGC Videsh, the Indian group's overseas investment arm, for about $5 billion. [ID:nL4N096XXX] But existing partners in the Kashagan project - state-run KazMunaiGas, Italy's Eni (ENI.MI), ExxonMobil (XOM.N), Inpex Corp (1605.T) of Japan, Royal Dutch Shell (RDSa.L) and France's Total (TOTF.PA) - have the right of first refusal on the stake.

ONGC Videsh Managing Director D.K. Sarraf told Reuters the Kazakhstan government has six months to approve the deal after the expiry of a 60-day period for partners to exercise their pre-emption rights.

"The deal has to be approved within 240 days," he said.

Kashagan holds an estimated 30 billion barrels of oil-in-place, of which 8-12 billion are potentially recoverable. Start-up of the field has been delayed since 2005 due to cost overruns and disputes with authorities over taxes. First production is expected next year.

REVIEW COMMISSION

Kazakhstan has first refusal on the stake, and a commission that reviews major deals could take up to two months to decide whether to buy, as well as consider the energy and economic security issues, Oil and Gas Minister Sauat Mynbayev told reporters in the Kazakh capital Astana.

KazMunaiGas was not immediately available to comment. Last month, Chief Executive Lyazzat Kiinov said the state company would be interested in principle in acquiring the stake. His deputy, Daniyar Berlibayev, said much would depend on the cost.

"We, as the national company, wouldn't refuse the idea of increasing our share. How we might finance this is another question," Berlibayev told Reuters on October 2.

KazMunaiGas has bought stakes from consortium members in the past, entering in 2005 by purchasing half of BG Group's BG.L 16.7 percent stake when that was put up for sale. Three years later, it bought around another 8.4 percent from consortium members.

Analysts said Shell and Exxon were unlikely to want to exercise their right of first refusal because of the ongoing problems at the project. Inpex, Japan's biggest energy explorer, which has a 7.56 percent stake in Kashagan, said it couldn't comment on the move by ONGC or whether it was offered the stake by ConocoPhillips.

SPOT SALES ARE AN OPTION

With ONGC's domestic output flat for years, India now buys nearly 80 percent of its oil needs and is the world's fourth-biggest oil importer. It is under pressure from the government to meet rising demand.

"We can bring it (the oil) to India, and other options are also there. There is a CPC pipeline and some pipelines are coming from Russia," Sarraf said, referring to the Caspian Pipeline Consortium facility. "We will look at all options, including selling it on spot markets."

ONGC has a 20 percent stake in Russia's Sakhalin-1 project, operated by ExxonMobil, and normally sells its equity oil through spot tenders.

The acquisition would likely add 1 million metric tons (1.1 million tons or 20,000 barrels per day) to ONGC Videsh's annual production over 25 years, with its share of output significantly higher in later stages of development.

"We have a target of 20 million metric tons of oil and gas production by 2017-18 and 60 million metric tons by 2029-30, and today our production is less than 9 million metric tons. This would help us bridge the gap to an extent and help in energy security," Sarraf said.

ConocoPhillips, which has been shedding overseas assets to cut debt and increase its investment in lower-cost domestic shale oil and gas, said on Monday the book value of assets related to its Kashagan interest was about $5.5 billion as of end-September, and it would take an after-tax impairment of about $400 million.

Sarraf said a deal may be funded through a mix of loans from ONGC and overseas borrowings. "We have yet to finalize the funding plan," he said.

ONGC Videsh, which holds a 25 percent share in the Satpayev block in Kazakhstan, owns stakes in assets in more than a dozen countries - including Myanmar, Vietnam, Sudan, South Sudan, Russia, Azerbaijan, Syria, Libya, Brazil, Colombia and Venezuela.

ONGC shares, valued at more than $38 billion, traded down 0.4 percent on Tuesday at 249 rupees.

(Additional reporting by Osamu Tsukimori in Tokyo and Raushan Nurshayeva in Astana; Editing by Ian Geoghegan)

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